As a qualified mediator that focuses on business valuation issues, I have been brought in many times to assist with conflicts associated with business valuation and family succession issues, when things do not necessarily go as planned. This article focuses on common problems and ways in which a qualified neutral familiar with business valuation can help the parties through this emotional and stressful time. Various parties offer expertise to assist with the process, but in the end a qualified neutral familiar with this process, valuation, and mediation can help resolve painful issues timely with far less emotional and physical resources expended.

Background

Business owners typically have most of their wealth tied up with their business and have limited liquidity. About three quarters of all businesses close when the business owner quits working. There is no buyer for the business. The business owner was able to pay themselves compensation, meet expenses, but in the end when the owner quit working the business shut down. There are really no significant conflict issues here related to succession planning.

For the one quarter of businesses that do have a buyer there are a host of  alternatives. The alternatives are not being elaborated on here. Rather potential pitfalls on transfers to family members are being identified with the intention of giving the business owner a heads up on how to address these concerns should transfer be to the next generation, an internal management team, an ESOP, or a particular buyer and frictions emerge.

Exit planning process

Having spoken to Exit Planning Institute chapters and worked with their members when everything has not come together as planned to help their clients, the commentary that follows illustrates how the system might normally work and what to do when it breaks down. It is beyond this article to consider the specifics of a sale of the business, private equity group recapitalizations, employee stock option plans (ESOPs), or gifting programs. This article primarily focuses on the transfer to family members when everything does not materialize as anticipated, but the comments relate to these other transactions too.

Readiness

Historically there are two key factors associated with the owner leaving the business. Is the owner financially ready to put together a succession plan economically and is the owner ready emotionally to initiate the process? Financially about 60% of owners find out that their business is not economically viable for how much they want to get out of the business for retirement once they initiate this process. That gives advisors the opportunity to work with the owner to enhance value. Emotionally, about 80% of owners are not ready to sell the business at the time they initiate this process. At some point the business will end by the owner leaving the business one way or the other. This group needs to develop an exit plan, succession plan, and continuity plan (for death, divorce, disagreements, disability, or disaster). Having experienced the shock of Covid-19, many business owners are now re-evaluating their alternatives currently.

Process

Historically, the owner reaches out to a trusted friend, a Certified Financial Planner, an estate tax attorney, a CPA, a Certified Licensed Underwriter (CLU-insurance), and a business broker and/or business valuer. This takes time and effort. For many businesspeople, working with six different individuals on this process is in and of itself often considered daunting. Procrastination sets in.

However, speaking to exit planners, an alternative is for these professionals to sit down with the owner as a group collectively, collaborate as a group, and from there come up with a plan to address exit planning, succession planning, and continuity planning. This group comes back with an optimal plan from their understanding of what the owner needs and wants. What an idea! The owner can then go over this with the trusted friend, potentially tweak the plan considering additional thoughts and interests to finalize the plan. The plan should be revisited periodically for example every two or three years or when there is a major regulatory, tax, or personal situation change. This collaborative technique involves less stress, a shorter time period to develop, and saves the client money. The Collaborative process works. However, in the real-world things happen in families and not everything falls in line as hoped.

When things do not go as planned

The business is a member of the family

Often the family business is seen as being another member of the family. There is a strong emotional attachment to the business given the blood, sweat, and tears that went into this business. The owners may have given birth to this business and watched the business grow or inherited or bought the business and been actively involved with the changes associated with the business with the psychological impacts similar to watching a child grow up. This makes the thought of leaving the business even harder.

Family members

When considering the next generation and potential succession planning there are a host of factors to consider. Some of the most significant issues may be:

• How much is the business worth?
• Is someone or some of the children interested and capable of taking over?
• If not now when?
• Are there other children that the owners want to treat fairly, but they are not interested in working in the business?
• How much control is the owner willing to give up and how quickly to whom?
• How much will the owner be paid and how quickly?
• How quickly does the next generation want to obtain control of the business?
• How much and how quickly is the next generation gong to pay for the business?
• Who did the owners love most as children and love most now?
• How does this interact into the decision making?
• How is sibling rivalry impacting the process?
• What about past events?
• What is the level of trust between parties?

These are simply a few of the more common issues that can materialize when addressing concerns in succession planning when family members are involved. So, when these kinds of issue threaten to stop the process from proceeding what can be done?

Mediation

A qualified mediator that is trained in mediation and that is certified in business valuation with background in this area, may very well have the requisite skills to help the owners and the next generation through a process of facilitation or mediation. This process brings together key participants in a neutral setting to go over the facts, the issues, the feelings behind those issues, and the interests of the parties to work through this process. Behind every position is at least one interest. Interests are the seeds to a solution. Someone with the right skill set to understand valuation and with extensive mediation skills in this area may very well be indispensable to help the parties come to a solution that can work for everyone.